Toll, Horton, Lennar: Are Housing Stocks Still Good After Liquidity Crunch?

Hot selling homebuilder stocks such as D.R. Horton, Inc. (NYSE:DHI), Toll Brothers Inc (NYSE:TOL), and Lennar Corporation (NYSE:LEN) (NYSE:LEN.B) have seen a fantastic rally last year amid increasing signs of a recovering U.S. economy. However, as every rally must come to an end, Federal Reserve chief Ben Bernanke acted villain to put an abrupt end to the rally in these stocks by sending clear signs that the expansionary monetary policy at the central bank will soon come to end. This means that the era of low interest rates will be soon in our rear view mirrors and the road to economic recovery will be become rockier. It is not rocket science to see that the housing sector – one of the biggest users of loans – stands to lose momentum. Here is a closer look at these star performers which might still deserve to be in stock portfolios:

D.R. Horton future earnings

Particularly sensitive to rising interest rates, shares of Texas based D.R. Horton, Inc. (NYSE:DHI) dropped 11.7 percent last week alone. The stock currently trades at compelling valuations and if it was not for the Fed’s move, this stock could easily be qualified as a value buy. Available at a price earnings ratio of 7, this housing heavyweight has retracted 24 percent from its 52 week high last month. At a debt equity ratio of 0.9, it is not a highly leveraged company. However, analysts predict its future earnings will be lower than what it earned in 2012. This is reflected in the forward price earnings ratio of 12.4 which is higher than the same metric for trailing 12 months. The company builds middle class homes and as such has a higher sensitivity to interest rates as most of its homes are sold on loans.

Lennar down 17 percent

Florida based builder of single family homes Lennar Corporation (NYSE:LEN) (NYSE:LEN.B) has lost nearly 17 percent of its valuations in the last month. At the start of the year, the stock was valued at $37.6 and went on scale a 52 week high of $43.9 in May. However, it has pared most of the gains accumulated in 2013. The company offers an attractive proposition in the form of forward price earnings ratio of 14.9 but it has a relatively high debt equity ratio of 1.5. Lennar Corporation’s focus is on smaller homes fit for single families. This set of buyers is never going to go out of the market which makes the stock immune to wild swings that some of its peers witness. At the same time, increased borrowing costs are likely to limit sales of new homes. This stands to eventually bring the company’s valuations in line with market realities.

Toll Brothers – old is gold, and gold is good

Toll Brothers Inc (NYSE:TOL) is another stock that has been hammered recently. Having lost 14 percent over the last 30 days, the stock currently trades at a price earnings ratio of 11. In the most recent quarter, Toll Brothers’ sales grew 38.1 percent to $516 million while profits surged 46.2 percent to $24.7 million, up from $16.9 million in the same period last year. Through its higher exposure to luxury housing, Toll Brothers stands at a somewhat higher perch than its competitors in terms of getting affected by the moves of Federal Reserve. Analysts are also upbeat about its prospects which are reflected in target prices of $42 and $39 from Argus and MKM Partners respectively. This compares to current level of $31.5 and indicates substantial upside.

It was not that the idea of the Fed slowing on its expansionary plans came out of nowhere. There have been ample indications that the economic steroids will be gradually phased out, but the market was in no mood to listen. Given the circumstances, this may be a blessing in disguise for investors looking to get into solid housing plays such as Toll Brothers Inc (NYSE:TOL).